Bad Buybacks Can Destroy Shareholder Value

David Trainer echoes our concerns about buybacks and makes a good point — with specific examples — about the misaligned incentives that lead to what he calls “bad buybacks.”

In theory, share buybacks are an efficient mechanism for companies to return cash to shareholders when they believe the stock is undervalued and have more cash than profitable investment opportunities.In practice, companies often buyback shares when their stock is at the highest point, and they sometimes pass up profitable investments or even go into debt to do the buybacks. The timing of buybacks can also be influenced more by when executives exercise their stock options than fundamental opportunity.The issue comes primarily from the poor executive compensation practices in place throughout most of corporate America. Executives are consistently incentivized to hit targets related to non-GAAP EPS and other metrics that are easily manipulated and have little connection to long-term shareholder value.